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Simple English definitions for legal terms
constructive receipt of income
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A quick definition of constructive receipt of income:
Constructive receipt of income is a tax term that means when someone has control over money they haven't physically received yet. This means that even if they haven't cashed a check or received the money, they still have to pay taxes on it. However, if there are restrictions on the money, like if it's not available until later, it doesn't count as constructive income. This rule can affect how much tax someone has to pay, especially if they use the cash method of accounting for their business.
A more thorough explanation:
Constructive receipt of income is a tax term that determines when a cash-basis taxpayer has received income. It happens when a person gets income that they haven't physically received yet, but they have control over it. The taxpayer is responsible for paying taxes on all income constructively received.
For example, if someone receives a check today but doesn't cash it for a year, it still counts as constructive receipt of income because they have the ability to cash it immediately. However, if someone is notified of a grant of company stock today but won't receive it until next year, it doesn't count as constructive income because it's subject to substantial limitations or restrictions.
It's important to note that businesses that follow Generally Accepted Accounting Principles (GAAP) or other methods of accrual accounting don't need to consider constructive receipt of income.
Overall, constructive receipt of income is a way for the government to ensure that taxpayers are paying taxes on all income they have control over, even if they haven't physically received it yet.